Swiss Franc edges lower as US Dollar gains offset lower yield impact

USD/CHF inches higher after two days of gains, hovering around 0.8280 during Asian hours on Tuesday. The pair moves little as the US Dollar (USD) remains stronger, driven by market caution ahead of looming interest rate decisions by the US Federal Reserve (Fed) due on Wednesday.

Financial markets expect the Federal Reserve to keep interest rates unchanged at its upcoming October meeting before potentially hiking rates again in December. According to the CME FedWatch Tool, market pricing currently reflects an 89.5% probability of a rate pause at the October policy meeting, alongside an 82.3% chance of a rate increase in December.

Heather Long, chief economist at Navy Federal Credit Union, said that “Inflation is still the No. 1 problem in the US economy, and there are a lot of signs it is getting more broad-based.” “For consumers, it means really high borrowing costs for the foreseeable future.” However, “given that it’s right before an election,” Heather added, “they won’t hike in October.”

The upside of the USD/CHF pair is restrained as the Swiss Franc (CHF) gains strength as the yield on the Swiss 10-year government bond fell to near 0.47%, driven by safe-haven demand amid growing concerns over Europe's fiscal outlook.

Swiss National Bank (SNB) Meeting Minutes revealed that policymakers observed inflationary pressures with no signs of spillover effects into the broader economy, attributing the recent rise in inflation primarily to higher oil prices and the depreciation of the CHF.

USD/CHF rally seen stretching toward nearby resistance

Strategists at UOB Group note that USD/CHF has extended its recent surge, with the Dollar “rising sharply to a high of 0.8255” on Friday and pushing on to “0.8278 before settling at 0.8271 (+0.27%)” yesterday. They acknowledge that “conditions are overbought after the sharp rise over the past two days,” yet still see room for the move to continue, highlighting “scope for USD to test 0.8290,” while cautioning that “a sustained advance above this level is unlikely.” On the downside, UOB flags “support is at 0.8250,” marking the first line of defense for the pair after its rapid ascent.